National Central Cooling Company PJSC (TABREED) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to Tabreed's Fourth Quarter 2019 Earning Call. I hand over the call to your host, Ms. Souad, Vice President, Strategic Communications. Madam, please go ahead.

Hi, this is Souad Jamal Al Serkal, Vice President of Strategic Communications at Tabreed. On behalf of Tabreed's management team, I would like to welcome you all, and thank you for joining us for the fourth quarter and full year 2019 results conference call. Before we begin our presentation, I would like to remind you that some of the statements made in today's conference call may be forward-looking in nature and may involve risks and uncertainties. Kindly refer to Slide 2 of the presentation for the detailed disclaimer. I would now request [indiscernible] for today's agenda. On today's call, we have with us Mr. Bader Al Lamki, Chief Executive Officer; Jean-Francois Chartrain, Chief Operating Officer; and Richard Rose, acting CFO. Bader will first provide the highlights of 2019. Following that, Jeff will provide an overview of the recent events and operational performance. Richard will then discuss the financial performance in more detail. Bader will then conclude the presentation, and we will open the lines for your questions. Thank you, and over to you, Bader.

Thank you, Souad. Thank you, everyone, for joining us today. Tabreed delivered another strong financial year, financially and performance -- the financial and operational performance, which was driven by our strategic growth initiatives. Key highlights of our performance in 2019 can be summarized as follows. The full year 2019 revenues grew by 5% -- 5.1% year-on-year, led by a 7% increase in the chilled water revenues. 2019 has seen a 10% increase in EBITDA. And as a result, our EBITDA margins grew as well from 48% last year to 50% in 2019. We saw strong capacity addition during Q4 of at least 21,500 RTs, mostly across the UAE and Saudi Arabia. Tabreed also added fire plants during the quarter, taking our total plants to 80 plants across the region. Total capacity additions throughout the year has been 51,300 RTs, of which 7,500 RTs were on the account of the recent acquisition of Masdar, 2 plants. Our annual guidance for capacity growth relates only to organic growth. In this regard, we guided addition of 65 RTs over 2019 and 2020. We have delivered 44,000 RTs already of organic growth, achieving 67% of targets in the first year alone. I would like to outline our revised capacity guidance for the next 2 years. Based on our current 5 contracts in hand, we expect to collect at least 75,000 RTs of new capacity over 2020 and 2021. This guidance updates and replaces the guidance we built a year ago. Finally, as per our policy of growing dividends in line with the growth of the business, the Board has proposed a dividend distribution of 10.5 fils, which is a 1 point [indiscernible] dividend distribution. This represents a consistent payout ratio of around 60%. I will now hand over to Jeff.

Thank you, Bader. We are moving on Slide #6, and this slide highlights the results of the initiatives undertaken by our business developments and operations team. Our growth during the year was a combination of greenfield projects, new connections to existing customers, as well as acquisition. It is important to note that our inorganic initiatives were all funded through the internally generated cash, which underpins the strength of our business model. During the year, we added 6 new plants, taking our total number of plants across the region to 80. This includes a 20 kRT plant at the King Khalid International Airport in Saudi Arabia; the 8.4 kRT plant at the Mall of Muscat in Oman; 2 plants acquired from Masdar in UAE; and 2 new plants for existing customers also in UAE. Tabreed acquired 2 plants from Masdar with current connected capacity of 7.5 kRT and a potential to reach 11.2 kRT in the near term. This acquisition provides us with future growth opportunity of adding up to 69,000 RT under the concession agreement with Masdar. Our acquisition of additional stake in Saudi Tabreed further strengthen our position as a leading international district cooling developer in one of the largest district cooling market in the region. Then our partnership with Bee'ah is aimed at exploring opportunities to bring reliable, sustainable and cost-efficient district cooling solution to the Emirates of Sharjah. Tabreed has initiated an ambitious midyear efficiency and productivity program, and I'm pleased to report that it has already started giving results. Water and energy efficiency performance in 2019 is encouraging, and we have now seen some meaningful cost savings. Tabreed adheres to international standard of safety and operational excellence. We achieved in 2019, 10 million man hours without API. This was a result of continued HFC focus. Strong operational performance and growth prospects, both in existing core markets of the UAE and GCC and in new geographies, will enable Tabreed to continue creating value for all our stakeholders. Now moving to Slide #7. We are providing the usual overview of the company. Tabreed is contributing to the region growth through efficient and environmentally friendly cooling, enabling sustainable development. As our business grows, so does our positive environmental footprint. We currently operate 80 plants across the region and delivering 1.18 million refrigeration turns to our clients. Our operations saved in 2019 over 2 billion kilowatt hours of energy consumption. It is enough to power 117,000 homes for a year and an equivalent to reducing over 1.2 million tons of CO2 emissions. Moving on the next slide. Tabreed is the only publicly traded and regional district cooling company in the world. The UAE is our base of operations, where we have a presence in 6 emirates, providing 795,000 tons of cooling to our customers through 67 plants. In addition to the UAE, we work with key strategic partners in 4 other GCC countries. We have a total of sales in plants outside of UAE, providing over 388,000 tons of cooling to customers. During the fourth quarter, we added 5 new plants across the region, taking our total number of plants to 80. Around 2/3 of our capacity is consolidated with the rest of -- while the rest is equity accounted for -- as associates and joint ventures. Moving to next slide. It outlines our capacity growth trends across the region. At the beginning of 2019, we announced that we expected to add at least 65,000 RTs of new connected capacity by 2020. In fact, during 2019, we added 51,300 RTs of capacity across the region. Of this capacity, 31,400 were added at the consolidated level and 20,000 RTs through joint venture and associate entities. As I have already mentioned, based on the current signed contracts in hand, we expected to connect 75,000 tons of capacity over 2020 and 2021. Of this, we expected [ split ] between consolidated level and equity accounted with joint venture to be 65%, 35%. I will now move on the next slide, #10. This slide presents the guidance and the connection trend. Over the years, Tabreed has demonstrated a track record of delivering upon its guidance. We have delivered more than half of the guided capacity additions in the first year itself. In 2019, Tabreed registered organic capacity and additions of 67% or 44,000 RT of the guided 2019-2020 capacity of 65,000 RTs provided last year. Our [ right size ] capacity guidance is now to add 75,000 RTs over 2020 and 2021. We continue to demonstrate our ability to deliver a steady increase in connected capacity in the region, driven by the growth in our key markets across the GCC and by successfully leveraging our operational network, to take advantage of commercial opportunities as and when they present themselves. I will now hand over to Richard to talk about our financial results in more detail.

Thank you, Jeff, and welcome, everybody, to this year's annual presentation of the results. This Slide 11 recaps our evolution of the performance of Tabreed over the years. And to summarize, Tabreed is a stable utility infrastructure business with long-term contracts and high-profile customers. This provides us with clear visibility of future earnings and cash flows, and we currently have 90% of our capacity contracted for at least the next 10 years. About 70% of our revenues are derived from government-owned and partly government-owned organizations, therefore, limiting our counterparty risks. Tabreed has a track record of delivering profitable growth and net income and EBITDA have increased by 9% per year since 2016. Our stable earnings enabled Tabreed to maintain an attractive dividend payout. And in line with our commitment to provide sustainable returns to our shareholders, the proposed dividend of 10.5 fils represents a 60% payout in line with last year. I'll now turn to talk to you about the financial results in a bit more detail. On Slide 13, we have the income statement. Tabreed recorded an overall revenue growth of 5.1% with chilled water revenue increasing by 7%. The main factors driving chilled water revenue growth were consumption revenue growth of over 2%, new capacity in the UAE and Oman, adding 1 point, CPI adjustments on the capacity revenues from being over the year added just over 1 percentage point and acquisition and consolidation of S&T in Q1 2018 made up the remaining. In a relatively difficult economic scenario, consumption growth reflects the resilience of our core business model. Value chain businesses accounted for 4% of consolidated revenues and 1% of EBITDA. PCBs are non-core to the business but continued to be profitable. Gross margin improvement was a combination of IFRS 16 and efficiency gains as discussed by Jeff earlier. IFRS 16 implementation resulted in reclassification of operating expenses in 2019. The depreciation of AED 20 million and finance costs of AED 17 million. Both depreciation and finance costs do not form parts of EBITDA, which results in a slightly higher EBITDA margins in 2019. Other gains this year include AED 27 million on account of initial recognition of new finance leases in both the UAE and Oman. And last year, we included the AED 32.6 million, a rise in gain -- arose on the sale of -- partial sale of our stake in Saudi Tabreed. Net income adjusted for all other gains would have grown by 16%. Turning now to Slide 14, the statement of financial position. Significant movements in the balance sheet as of the end of the year compared to last year were primarily due to IFRS 16. This increased fixed assets due to the recognition of [ market use ] assets, formerly known as upgrade [indiscernible] assets. We've also seen strong receivables collection. Receivables in -- compared to December '18, in line with revenue growth and actually down compared to our Q3 September '19 results. Increase in corporate debt, primarily due to increase in lease liabilities on account of IFRS 16. And we continue to deleverage and adjusted for IFRS 16 impact, total debt reduced by AED 143 million year-on-year. Turning now to the cash flow statement, Slide 15. Tabreed continues to generate strong cash flows, which are being utilized to invest in growth and provide dividend returns to the shareholders. Operating cash flow increased by 18% over December '18 and was strong at AED 782 million, which reflects the higher profitability of the business. Dividends received were higher than last year due to a special dividend from Saudi Tabreed at the time. So it was higher last year than this year due to the special dividend that we received from Saudi Tabreed at the time of that dilution of our stake. Investing activity this year also included increasing our stake at Saudi Tabreed again and last year reflected the acquisition of S&T Cool. Our cash-generating ability remains robust, driven by the long-term price setting contracts and enabling continued investment in growth of the business. Slide 16 is the usual summary of our debt portfolio. This slide provides the background as of December '19. Tabreed currently has AED 2.9 billion of net debt and a gearing ratio of 39%. However, it's important to note that IFRS 16 has increased reported debt by AED 295 million and net debt-to-EBITDA by 0.2x. Excluding this impact of the accounting standards, both net debt and net debt-to-EBITDA are lower than last year. Following the refinancing of our corporate facilities with a 7-year sukuk and new corporate loans, we had relatively light scheduled repayments until 2025 when the said sukuk becomes due for repayment. Net debt and net debt-to-EBITDA has declined since 2016, as debt has been repaid and EBITDA has grown. That concludes the detailed review of the results for 2019. And I'll now pass back to Bader for closing comments.

Thank you, Richard. Before we open the lines for Q&A, let me make the closing remarks. As a stable utility business model, Tabreed continues to deliver strong financial and operating performance, with rising profitability, stable margins and robust cash flows. In line with our commitment to enhance shareholders' return, our Board has recommended a dividend of 10.5 fils per share for 2019, translating into a 60% payout. In January 2019, we provided capacity addition guidance of 65,000 tons [indiscernible] over the coming 2 years and delivered 51.3 RTs during the year. We have now updated the guidance to add 75,000 tons over 2020 and 2021. Tabreed has a flexible capital structure to fund future growth. As we have mentioned before, we will look at opportunities within and beyond the GCC, and provide you with an update as and when such opportunities materialize. Today, Tabreed is stronger than ever before. We have a stronger shareholder base and the management team with significant industry experience that expands over 22 years. We are working on various funds from business development to operation to hand you -- to deliver growth and improve profitability.

Thank you for joining us for our fourth quarter and full year 2019 earnings call. We will now take any questions you may have.

[Operator Instructions] The first question comes from Divye Arora from Daman Investments.

This is Divye. So what we have seen is that there is a strong growth in -- this is the first question. There is a very strong growth in the revenues in the Q4. The revenues are up around 10% to 11%. So can you please explain what is behind the strong growth, other than the CPI and the consumption growth? Is there any one-off there in the revenues? The second question is, if we -- on a net income level, if you adjust for the one-off gains, so the income has grown by around 16% versus last year. Is there any impact of IFRS 16 on the net income? If you strip that out, then what is the growth on a like-for-like basis? And what is the impact on the net margins of the operating efficiencies that you have achieved?

Thanks, Divye. This is Richard. I'll take those questions. So with regard to the Q4 growth in revenue, there is a one-off in there, which is around about AED 25 million. And that's arising from settlement of some issues that we have with one of our customers [indiscernible] service commencement basis, which go back over a quite a long period of time. And we managed to resolve those all at once quite unexpectedly, but very successfully, and that resulted in us recognizing an additional 25% -- AED 25 million in revenue in Q4. That won't be repeated again, it doesn't have any issues like that.

So this was not the receivables, right? This was like you would never recognize [indiscernible].

Sorry?

So this is basically something which you'll never recognize as a revenue before? [indiscernible]

Yes. That's right. That's right. That's correct. And then with regards to IFRS 16, that doesn't have any impact on net income. It reclassifies the costs associated with operating leases within the income statement onto different lines, so it can have some impact on the margin levels higher up in the income statement that doesn't have an impact on the bottom line net income.

All right. So this growth we have seen in the net income of 16%, if you strip out the other gains and losses, so this is coming obviously from the revenue growth. So if we strip out even the one-off revenue, is there -- how much of the cost attached to that revenue? The one-off, which you've have taken AED 25 million? Is there a cost of that or is this just flowing into net income directly?

No. It's just flowing down, Divye. There is no cost associated with that. So to answer your last question, sorry. With regard to the efficiencies, I think we're at the beginning of the -- hopefully what's a long journey in terms of operational improvement and using automation to try and develop the way that we run our business to make it as efficient as possible. I think what we can say now is that in the 2019 results, we're looking at low double-digit impact on the net income level from the efficiency gains that we've made in 2019.

Sorry. Low double-digit impact?

I mean [indiscernible] recurring. Yes. That's correct.

Okay. So if you strip out the one-off impact of this revenue, then obviously -- and take out the other gains and losses from both 2018 and '19. So you have -- your income is growing by around 9%. So which shows the impact of the growth in revenue, plus the margin increase together.

Yes. That's correct.

[Operator Instructions] There are no further questions in the conference call. I will now give back the floor to the company. Thank you.

That concludes our full year 2019 earnings call. Tabreed looks forward to interacting with you at our earning conference calls and investor conferences. Should you have any further questions, please do not hesitate to contact us. Have a great day, and thank you once again for joining this call.

This concludes today's conference call. Thank you all for your participation. You may now disconnect your lines. Thank you.